Only a few years ago, an ugly legal dispute between Chinas beverage giant Wahaha and joint venture partner Danone over the right to use the Wahaha brand had brought a cloud over both in China. With the dispute resolved last year, Wahaha is well-positioned to turn its attention to new products. Forbes talked to Chairman Zong in his office in Chinas eastern city of Hangzhou about this years business outlook, new products and succession. Excerpts follow.

Zong Qinghou: The market will continue to grow more than 20%. The market has become concentrated--about five companies--Wahaha, Coke,
Pepsi
, Tingyi and President have more than half, and if you add in about 10 more firms, the total is 80%. The bigger companies will have a larger and larger market shares. Also, more and more companies will be looking to differentiate their product. China already has one of the largest number of drink varieties in the world, and this will continue.

What would you say is behind Wahahas success?

We have a segmented product strategy. Not long ago, most beverage companies in China had similar products and competed on price, which lowered profitability. A few years ago, we started looking more for products that others didnt have. This is helping our sales and our profits. Also, once you have scale, as we do, you get better efficiency from advertising. If you have 20 billion RMB in sales and spend 1 billion RMB in advertising, thats 5% of your revenue. But if you have 40 billion in sales, that percentage of your cost falls to 2.5%. In that situation, even if youre pricing is the same as your competition, youre going to be more profitable. We have another advantage: we produce a lot of our own packaging, which helps our profit margins.

Were also successful because were in China. The U.S. and European markets have become mature, profit margins are lower and equipment isnt so new. Because profits are relatively low, it limits the willingness of companies to invest in newer equipment. Weve invested more, and thats good for growth.

What is the sales outlook for Wahaha this year?

Last year sales were about 43 billion RMB ($6.3 billion). We want to increase that by 10 billion [RMB] this year. In the next three years, we want to reach 100 billion RMB. The market is vast--1.3 billion people--and there are good prospects in many segments.

What kind of new products is Wahaha bringing into the market this year?

This year, were introducing a lot of new juice products. In the past, we didnt make an earnest push. We are working to understand the tastes of people born in the 1980s and 1990s--it is very different from my generation. We do our own research. Marketing research companies, I think, are relatively academic. I spend about half of my time outside of the office talking to people. It used to be two-thirds, but were a larger business now and I spend more time here.

What new products are you working on for the next few years?

Looking ahead, the living standard of ordinary people in China is rising. But many people find themselves with illness as they become successful: higher blood pressure, and diabetes. So today, people are paying attention more and more to their health. In the future, we should meet the wishes of consumers to have beverages that are good for their health. We are also broadly looking at IT-related investments.

What kind of health beverages are promising?

Our approach is to think about health needs and develop beverages that address those, such as those that lower blood pressure. We are working with different research institutes, including Zhejiang University.

Are there comparable products overseas?

Not yet. Overseas, these would be pharmaceutical products, and sales of those are restricted in China. But many come from raw materials that are actually food and can be used in beverages in ways that follow our restrictions here.

You wont enter the drug business?

No.

And youre thinking that these will become mainstream products for you?

That is the future direction.

When will these new products start come to market?

In one or two years.

Larger food and beverage companies in China are diversifying. Want Want, for instance, has been strong in snacks but is making a big push in juice, for instance. How will Wahaha address that?

Were not afraid of competition. To meet competition, however, you have to continuously innovate.

The end of your disagreement with Danone ends a lot of legal uncertainties. Do you have any plan to take Wahaha public?

No. We have ample cash. We dont need the money.

Wahaha is closely associated with you personally. Do you have a plan for a successor?

I havent clearly identified one. But I have been building up our management system. In China, you have to have a strong leader for a business to get anything done. I think eventually, the successor will be someone who can get things done.

I'm a senior editor and the Shanghai bureau chief of Forbes magazine. Now in my 16th year at Forbes, I compile the Forbes China Rich List and the Taiwan Rich List. I was previously a correspondent for Bloomberg News in Taipei and Shanghai and for the Asian Wall Street Journ...